Ask Ron Baker: Firing Customers

“You don’t have to like every client – indeed, that’s the whole point, since you can’t. Hence the need arises to decide on whom you do like, and to structure a plan to get more of their work, and the work of clients similar to them.” – David Maister, True Professionalism

A frequent question we are asked is how to fire a customer, while maintaining your professionalism and reputation, especially if you practice in a small town.

Recall the Adaptive Capacity Model from last month’s article – the idea that your firm is an airplane containing different customer segments. What happens when your plane becomes filled with too many “C,” “D” and “F” customers?

Many consultants of firms estimate that the average firm contains between 10 and 40 percent of “F” customers. It is never easy, but it is necessary, to remove these customers from your firm.

Start with those customers whose personalities clash with the culture of your firm, or whose character is in question. Once that is completed, then you can focus on removing other low-valued customers (such as the “Cs” and “Ds”).

These customers are usually the ones who complain most vociferously about your price, and the debilitating effect is that we tend to listen to them the most, which affects how we price our “A” and “B” customers.

One caveat: Be sure you have done everything within your power to turn a low-value customer into a high-value customer. The fact of the matter is that your customers are not going to get better until you do.

All that said, how should you fire a customer? There are many strategies, some more effective than others. In the early days of implementing this strategy, many firms would simply raise their prices by a factor of two or four, and to their surprise, a supermajority of the customers remained with the firm (an indicator of just how much money firms leave on the table through suboptimal hourly billing).

Nevertheless, it is strongly advised that you not utilize this strategy. The goal is to remove the customers, thereby freeing up capacity, not simply increasing their price. Getting two or four times more from an “F” customer does not make him a “C,” “B,” or “A” customer (this is the ethics of the world’s oldest profession, not of true professionals).

A meeting is the best – and most dignified – strategy. You may line up other professionals as potential referral sources (one of your “D” or “F” customers could be his or her “A” or “B” customer). Some firms have even sold off these customers to other firms, while other firms have created a separate firm housing their lower-valued customers, thereby creating a different brand, which maintains the pricing integrity of the higher-value firm.

In any event, when it comes to having a discussion regarding terminating a customer, here is an example from a CPA firm of a possible conversation you might have:

“Mary, we need to talk about how well we’re working together. We need to be sure that the range of services we offer matches your needs. Here in the firm, we want to work with people where we can add significant value to their business, rather than just crunching some numbers and filling in some tax returns for them.

“This means we are reducing the number of clients we work with and increasing the range of services we provide for them. We’re working with them on growing their businesses by offering consultative services. Naturally, this means that our price levels are increasing, too. Many of our clients are comfortable with that extra investment because of the value we are providing them in return.

“Mary, unless I’m very mistaken, we simply can’t provide you with that value. It seems to me that your needs would be better served by an accountant who just wants to stick to the numbers. How do you feel about that?”

The Forced Churn

In the mid-1990s, Lake Tahoe began a major renovation, where many older motels, stores and other buildings were bulldozed down by the lake, just on the California side of the state line. A local newspaper article claimed that for every new room added, somewhere between two and three would be lost. Obviously, the developers were shifting up the value curve by constructing higher-end hotels, timeshares, condominiums and so forth. Why shouldn’t firms remove somewhere between one and four customers for every new one added?

This led to the concept of what we have since labeled the forced churn. The cable and cellular phone industry track the churn rate – that is, lost customers are divided by new customers acquired (you can perform the calculation with both the number of customers and the revenue from the customer).

As a way to upgrade your firm’s customer base from “C,” “D” and “F” customers, each time a new customer is obtained, you would fire somewhere between one to four old customers. Of course, the exact ratio would depend on how many “C,” “D” and “F” customers your firm has and what factor the leaders are comfortable with.

Not only would this free up capacity to serve new customers, it would also shift the firm up the value curve, allowing your plane to add more full fare coach, business class and first class seats.

The French have a wonderful saying that epitomizes this strategy: Recueillez pour mieux advancer, which translated means, “Fall back, the better to advance.” By implementing this strategy gradually, many firms feel more comfortable upgrading their customer base, and their sense of security is not jeopardized all at once.

About the Author

Ron Baker

Ron Baker started his CPA career in 1984 with KPMG's Private Business Advisory Services in San Francisco. Today, he is the founder of VeraSage Institute — the leading think tank dedicated to educating professionals internationally — and a radio talk-show host on the www.VoiceAmerica.com. His show, The Soul of Enterprise: Business in the Knowledge Economy, can be found here: www.thesoulofenterprise.com.